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Aggressive savers may have cheered the higher 401(k) contribution limits that went into effect for 2017, which specified $18,000 for employees who are younger than 50 and $24,000 for those who are older than 50. However, some people may not have noticed that many 401(k) plans also allow additional after-tax 401(k) contributions up to the IRS limit of $54,000 for all 401(k) contributions in 2017. The cap is set at $60,000 if a person is over 50.

For example, Doug put $18,000 into his 401(k) this year. He’s over 50, so he put in an additional $6,000. Mueller Prost’s match was also $6,000. If the Mueller Prost 401(k) plan allows after-tax contributions, Doug can contribute an additional $30,000 to his 401(k). Doug can do this because $60,000 less $24,000 less $6,000 equals $30,000. Imagine a married couple having the ability to put away an additional $60,000 per year. Mold shops should consider amending their plans if they do not allow this provision.

The ability to make those after-tax contributions isn’t new, but IRS regulations now specify how to handle those after-tax monies when rolled over into an IRA. Note that those after-tax contributions should not be confused with Roth 401(k) contributions. (For more on that, see the sidebar.)
Assuming the plan allows for after-tax contributions, and the investor follows the correct steps when converting them, the after-tax contributions become Roth IRA contributions after conversion. This offers aggressive savers greater access to Roth contributions than would be the case if they relied strictly on direct Roth IRA 401(k) and IRA contributions.

Glossary

Individual Retirement Account (IRA) is more of an individual retirement plan that provides tax advantages for retirement savings.

Traditional IRA is a type of IRA whereby the contributions may be tax-deductible in which the income earned by the IRA are not taxable, but withdrawals made at retirement are taxed as income.

Roth IRA is a type of IRA whereby the contributions are not deductible, but income earned by the IRA are not taxable and withdrawals made at retirement are not taxable.

A Roth 401(k) combines the features of a Roth IRA and a traditional 401(k) plan. Employers must amend their 401(k) plan document to allow employees to elect Roth IRA contributions. Once an employer amends its 401(k) plan, employees electing “Roth type” contributions receive the same benefit as if they are contributing to a Roth IRA. That is, the invested dollars will grow tax free, and when withdrawn will not be taxable.

How It Works

The IRS regulations allow the retiree to effectively segregate the after-tax assets from the pre-tax monies at the time of rollover into an IRA. Pretax 401(k) assets (both pretax contributions and all investment earnings) can be rolled into a traditional IRA, whereas the after-tax dollars can be converted into a Roth IRA. This represents a recent change from the past when investors had to engage in a series of complicated maneuvers to segregate their after-tax dollars from their pre-tax 401(k) monies to get them into a Roth IRA.

An employee can contribute more money and access his or her 401(k) for this Roth rollover by doing an in-service, non-hardship withdrawal. This enables the employee to withdraw either a portion of or all of his or her plan’s account balance upon request without demonstrating a specific financial need. This means that the employee can continue benefitting from tax-deferral status and add a tax-free status without incurring an immediate tax liability or penalty, which means that now employees can take out money without leaving their jobs. Ask your plan administrator if this is an option at your shop.

Even if an employer-sponsored retirement plan permits these withdrawals, participants must meet certain requirements. These may include a minimum age restriction (usually permitting only those 59 and a half years old or older), a length-of-service requirement (often two or five years) or both.
Employer-sponsored retirement plans also often limit these withdrawals to vested employer-matching contributions, plus earnings, and rollovers and earnings from previous employer plans. Some plans allow employees who are 59 and a half years old and older to withdraw their entire balance without further restrictions while others require spousal consent for in-service withdrawals.

Because each employer-sponsored retirement plan is different, moldmakers should determine which assets in their shop’s plan are eligible for these withdrawals—for example, after-tax contributions plus earnings, rollover amounts plus earnings, company match contributions plus earnings and before-tax contributions plus earnings (if you are disabled or have reached 59 and a half years of age).
The contribution of after-tax 401(k) dollars married with in-service distributions can equal large amounts of retirement dollars in Roth IRA and traditional IRA accounts, and combining this with a back-door Roth IRA can mean huge dollar amounts in a person’s Roth 401(k).

Steps for Making an In-service, Non-hardship Employee Withdrawal

1. Contact the retirement plan administrator to determine whether your plan allows these withdrawals and whether you are eligible to take them.

2. Ask, if the withdrawals are available, and you are eligible to make them:

Which assets are eligible?

How much can you withdraw?

Does the plan impose penalties, including suspensions or deferrals of company contributions, for these withdrawals?

What are the processing requirements and distribution timelines?

3. Contact your tax advisor to discuss the potential tax implications of making these withdrawals.